Friday, April 28, 2017

We See The Obvious But Fail to See The Less Obvious.., Obviously -- Part 1 – Historical Perspective

illustrated by William Wallace Denslow
             All of us are familiar with the Mother Goose nursery rhyme Little Jack Horner but look at his experience the next Christmas.

Little Jack Horner sat in a corner, eating his Christmas pie; he put in his thumb and pulled out mincemeat and said, “What is this?? What a mess! This isn’t plum pie, now I have to wash my hand and cook will box my ears and I’ll get nothing for my pilfering.”

             Little Jack Horner experienced the impact of unintended consequences. The previous Christmas he had tried the same stunt with cook; stole a pie from the cooling rack and in a quick stroke stuck his thumb into the pie and hit a plum. He loves plums and felt very fortunate. Latter cook found him and boxed his ears but he felt vindicated. He got the plum. This year he tried the same trick; he stole a pie from the cooling rack, but didn’t realize it was mincemeat. In his haste to avoid cook he didn’t look closely. He hates mincemeat and when he failed to spear a plumb with his thumb he was sorely disappointed at a handful of mincemeat! Yuck, no, double yuck. Not only did he have to wash his hand but he didn’t get a plum and cook still boxed his ears. Not at all satisfactory. What went wrong, he says to himself. “It worked so well last year. I did the same things, why no plum?”

             In  1776 Adam Smith’s book, The Wealth of Nations was published in which he discusses his “invisible hand” which is a famous metaphor and is an example of a positive unintended consequence. His contention  that the baker, butcher and others do things for their own self interest and yet they supply food for the greater public provides the positive impact to their own selfish acts of acquiring money through the sale of goods (food). Hence, a positive unintended consequence.

             Earlier, John Locke the English philosopher and physician urged the defeat of a parliamentary bill in 1692. The bill was designed to cut the maximum permissible rate of interest charged on loans. Locke argued that instead of benefiting borrowers, especially small borrowers which was the stated purpose of the legislation it would hurt the very people it was meant to help. He suggested the actual results would be less available credit not more credit and a redistribution of income away from “widows, orphans and all those who have estates in money.” This is an example of the more common perverse nature of unanticipated or unintended consequences unlike Adam Smith’s positive unintended consequences.

             In 1850 Frederic Bastiat, a well respected French economist, published a paper shortly before his death titled What is Seen and What is Not Seen, or Political Economy in One Lesson. Bastiat was very aware of what he called “seen” and “unseen”. The seen were the easily recognized, obvious or visible consequences. The unseen were the less easily recognized, less obvious or unintended consequences. He was concerned that politicians,  policy makers, economists, bureaucrats and others were ignoring the impact of the unintended. He made the following statement, “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.” I think Bastiat is suggesting that more effort is required to be a good economist than a bad one. It takes effort, time, energy and knowledge to “foresee” possible impacts from current rules and activities. To explore the possible impacts is much more challenging than looking at the immediate, visible impacts only. I believe such actions require a much greater commitment to finding the answers or truth than most of our current political and business leaders are willing to allocate. The lack of effort is unfortunate in the most benign cases and very damaging in the worst cases.

             One of the most comprehensive analysis on the concept of unintended consequences was done by Robert K. Merton in 1936 in an article titled The Unanticipated Consequences of Purposive Social Action. Merton identified five sources of unanticipated consequences; 1) ignorance, 2) error, 3) imperious immediacy of interest, 4) basic values, and 5) self-defeating prediction (also the reverse of the idea would be the self-fulfilling prophecy). Merton suggests that the first two are the most pervasive but the others can and are destructive too. The imperious immediacy of interest refers to instances were the individual wants the intended consequence so much that he purposefully chooses to ignore any unintended effects. Think of blind obedience to a program or course of action or willful ignorance. An example of this would be that the Food and Drug Administration creates enormously destructive unintended consequences with its regulation of pharmaceutical drugs. By requiring drugs not only be safe but efficacious for a specific use the agency slows the introduction of life saving drugs, many times by years. Time when many sufferers may die or suffer needlessly because the drugs are not available. According to some articles, the consequences have been so well documented that regulators and legislators now foresee it but accept it. Merton suggests that the basic values consequence can be seen in the Protestant work ethic. He says it “paradoxically leads to its own decline through the accumulation of wealth and possessions.” In his final point, self-defeating predications, he points to the population growth warnings in the early 20th century which would lead to mass starvation. The very fact that people were concerned lead to increased research and development of food production which increased production and has since made the likelihood of mass starvation very much reduced.

             The law of unintended consequences is working always and everywhere. I believe governments and bureaucrats are particularly susceptible to ignoring or discounting unintended consequences. Also special interest groups tend to pick and choose their desired results, regularly disregarding unintended consequences as minor problems or inconveniences. Trade policies help one industry at the cost to some other industry or group. After the September 11th, 2001 terror attacks there was an outpouring of support and concern which was needed and helped the country work through the trials, destruction, death and pain. However, it has been suggested that so much money was funneled to the 9/11 effort that other important charities and causes suffered significant problems for some time after trying to raise funds for important and worthy causes in disease control, relief of hunger, basic research and other humanitarian aid. Where does one draw the line? One final example I found relates to 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.
             In following blogs we will examine Bastiat and Merton more fully. Bastiat, looking and writing in the 1800’s sees things with a certain clarity. Merton 80 years later created terms and thoughts that help clarify and expand the concepts. Finally, we will look at modern workplace, government and society for current examples and situations. Don’t make snap judgments on this, stay with it and let’s see just what unintended consequences we may discover.

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