Toward a Better Understanding of the Law of Unintended Consequences

We recently published a column describing a few instances of the law of unintended consequences — specifically, what happens when well-meaning legislation winds up hurting the parties it is designed to help.

I thought it was a pretty good column. But I see now where it could have been better. Alex Tabarrok, writing on Marginal Revolution, addresses the law of unintended consequences per se, something our column didn’t do. In writing a column, or even a book, there is always a struggle between how much theory to write and how much story to write. In this case, I wish we’d included a bit more theory — if, that is, we’d been able to explain it as well as Alex has.

For example:

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.

Unintended consequences are not restricted to government regulation of society but can also happen when government tries to regulate other complex systems such as the ecosystem (e.g. fire prevention policy that reduces forest diversity and increases mass fires, dam building that destroys wet lands and makes floods more likely etc.) Unintended consequences can even happen in the attempted regulation of complex physical systems (here is a classic example involving turbulence).

The fact that unintended consequences of government regulation are usually (but not always or necessarily) negative is not an accident. A regulation requiring apartments to have air-conditioning, for example, pushes the rental contract against the landlord and in favor of the tenant but the landlord can easily push back by raising the rent and in so doing will create a situation where both the landlord and tenant are worse off.

More generally, when regulation pushes against incentives, incentives tend to push back creating unintended consequences. Not all regulation pushes against incentives, some regulations try to change incentives but incentives are complex and constraints change so even incentive-driven regulations can have unintended consequences.

Does the law of unintended consequences mean that the government should never try to regulate complex systems? No, of course not, but it does mean that regulators should be humble (no trying to remake man and society) and the hurdle for regulation should be high.

It is only Alex’s last paragraph that significantly overlaps with what we wrote. Everything else is value-added. I’m not saying we should have loaded up our column with theory, but having read Alex’s very good take on the issue, I’m grateful that these interwebs exist in order to allow people to so efficiently and gracefully build upon existing writings.