What does Hoy No Circula in Mexico and Cane Toads in Australia have in common? The law of unintended consequences. This says that the actions of people – and especially of government – often have effects that are unanticipated or not intended. Unintended consequences are usually seen as being negative such as when an intended solution perversely makes a problem worse, or when although the solution produces the desired result, there are also detrimental side effects. However they can have a positive, unexpected benefit, and because of this they are often seen as the result of luck or serendipity.
Unfortunately although the law of unintended consequences should be seen as a warning to tread carefully when it comes to intervening in complex issues, politicians and popular opinion often don’t seem to learn this. The adage that ‘anything that can go wrong, will go wrong’, known as Murphy’s law, should remind us against believing that we can fully control events.
What are the causes of harmful unintended consequences? They have been categorised: perverse incentives, human stupidity, self-deception, incorrect analysis of a problem, immediacy of interest (ie. someone wants the intended consequence of an action so much that they purposefully choose to ignore any unintended effects), failure to account for human nature, and the world’s inherent complexity.
The French economic journalist Frédéric Bastiat understood the fact of unintended consequences when he wrote in 1850:
“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.”
But even with foresight, economics seems beset with unintended consequences. Raise taxes, and more will find ways to avoid it. Guarantee bail outs and banks will take more risks (this is called a moral hazard). Reduce taxes for fuel-efficient cars and there will be slide in tax revenue as more cars will be made that use less fuel. Is this why it is said that if you ask five economists the same question you will get five different answers?
Examples of unintended consequences are found in every sphere of human endeavour. Here are some of them.
In 1830, Wellington’s government passed the Beerhouse Act, which abolished the beer tax and allowed any ratepayer to sell beer on payment of an annual fee of two guineas (£2.05). The idea was to encourage the drinking of beer, and stimulate the depressed and potentially subversive agricultural sector, at the expense of spirits, most commonly associated with excessive consumption in the disreputable ‘gin palaces’. However beer house numbers exploded with more than 33,000 vendors having paid their two guineas by 1832. Sometimes called ‘Tom and Jerry’ shops or ‘tiddlywinks’, they sprang up in alleyways and cellars and were impossible to police. Many beerhouses became the haunt of criminals, prostitutes and some even became brothels. It was only with the Wine and Beer House Act of 1869 that the law was changed to bring licensing back under the control of the local justices.