Economics 101

How to "See" the Unintended Consequences

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Choice is full of uncertainty.  Every time we make a choice we are making a bet over a particular set of outcomes which we can predict.  Sometimes we predict rightly, sometimes we never see what is coming.  Not only do we make decisions in the uncertain and unpredictable world, we also make choices that have consequences.  Some of the consequences are foreseen and predictable, and some are unseen and these we refer to as an “unintended consequences.”

Some unintended consequences are beneficial and have positive effects on others and/or ourselves.  Some unintended consequences are negative and either hurt us and/or others.  Here we see the knowledge problem so accurately characterized by F.A. Hayek rearing its ugly head again.  We can’t foresee or plan for them.  They are unintended.  We can, however, learn from them and we can try to understand how they might change our incentives.

For example, when we joined our new neighborhood church five years ago, I had no idea that I would find such a close friend in the church, that we would serve together on teams and that our children would love to play together. At the time I didn’t even have a child!  It has been a blessing, but it was not the purpose of joining the church.  So although our choice to join that church was purposeful and intentional, gaining these friendships was not the goal of that choice.  It has been an unintended blessing. I didn’t intend the outcome, but God certainly did.

Remember, as far as economics is concerned, we are talking about what we intend with the choice. When economists are referring to unintended consequences, they are often referring to the negative unintended consequences.  And these most readily present themselves as the product of regulation and legislation.

In 1850, Frederic Bastiat, a French classical liberal theorist, wrote an essay titled “What is Seen and What is Unseen” in which he details these effects.

In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause – it is seen. The others unfold in succession – they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference – the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, – at the risk of a small present evil.

 

In fact, it is the same in the science of health, arts, and in that of morals. It often happens, that the sweeter the first fruit of a habit is, the more bitter are the consequences. Take, for example, debauchery, idleness, prodigality. When, therefore, a man absorbed in the effect which is seen has not yet learned to discern those which are not seen, he gives way to fatal habits, not only by inclination, but by calculation.

 

This explains the fatally grievous condition of mankind. Ignorance surrounds its cradle: then its actions are determined by their first consequences, the only ones which, in its first stage, it can see. It is only in the long run that it learns to take account of the others. It has to learn this lesson from two very different masters – experience and foresight. Experience teaches effectually, but brutally. It makes us acquainted with all the effects of an action, by causing us to feel them; and we cannot fail to finish by knowing that fire burns, if we have burned ourselves. For this rough teacher, I should like, if possible, to substitute a more gentle one. I mean Foresight. For this purpose I shall examine the consequences of certain economical phenomena, by placing in opposition to each other those which are seen, and those which are not seen.

Bastiat hits the nail on the head in two ways.

  1. He helps us understand stewardship in a new light.  We need, to the best of our ability, to try and understand all the ramifications of our actions, to try to understand what will happen down the road as a result of our choices.  We need to try and see the unseen.
  2. It also helps us understand that those things which we might pursue in the short-term that seem wonderful, may have long-run negative impacts on our lives and the lives of others.  We need discernment both in our public and private choices so that we can be better stewards of our resources.

Next week we will go through some specific policy examples which have brought long-term negative unintended consequences and how that discernment can help us be better stewards.

Question: Do you consider the unintended consequences when you make economic decisions? Leave a comment here.

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