The Law of Unintended Consequences

Dubner and Levitt have an article in the NYTimes with three examples of the law of unintended consequences, the Americans with Disabilities Act made it more costly to hire people with disabilities and reduced their employment, ancient Jewish sabbatical law intended to help the poor has made them worse off, and the endangered species act has resulted in habitat destruction.

In light of this Andrew Gelman asks a deep question, What kind of law is the "law of unintended consequences?"

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.


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