On the wonderful landscape of economics, several highly visible landmarks are in the form of "laws:" The law of supply and demand, of economies of scale, of diminishing marginal utility, of the downward stickiness of wages, of decreasing returns to factors of production, etc. But my favorite by far, which strictly speaking is not limited to economics-land, is the law of unintended consequences. And herewith a celebration of that Law.
Rarely do I cite The New York Times or, for that matter, The Wall Street Journal as a source—on the assumption that you all read them anyway—but rules are made to be broken, so I commend to you "Unintended Consequences: Why do well-meaning laws backfire?" The examples are legion.
The Endangered Species Act of 1973 has demonstrably increased incentives for landowners to make their land holdings inhospitable to endangered or potentially endangered species, in order to preserve their options for development.
"The economists Dean Lueck and Jeffrey Michael wanted to gauge the E.S.A.’s effect on the red-cockaded woodpecker, a protected bird that nests in old-growth pine trees in eastern North Carolina. By examining the timber harvest activity of more than 1,000 privately owned forest plots, Lueck and Michael found a clear pattern: when a landowner felt that his property was turning into the sort of habitat that might attract a nesting pair of woodpeckers, he rushed in to cut down the trees. It didn’t matter if timber prices were low.
"This happened less than two years ago in Boiling Spring Lakes, N.C. ‘Along the roadsides,’ an A.P. article reported, ‘scattered brown bark is all that’s left of once majestic pine stands.’ As sad as this may be, it isn’t surprising to anyone who has examined the perverse incentives created by the E.S.A. In their paper, Lueck and Michael cite a 1996 developers’ guide from the National Association of Home Builders: ‘The highest level of assurance that a property owner will not face an E.S.A. issue is to maintain the property in a condition such that protected species cannot occupy the property.’"
Or consider another eminently well-meaning act, the Americans with Disabilities Act, intended, at a macro level, to "mainstream" disabled Americans. So has it in fact increased access for its intended beneficiaries? Think again.
"[Economists Daren] Acemoglu and [Joshua] Angrist found that when the A.D.A. was enacted in 1992, it led to a sharp drop in the employment of disabled workers. How could this be? Employers, concerned that they wouldn’t be able to discipline or fire disabled workers who happened to be incompetent, apparently avoided hiring them in the first place."
A nice anecdote, bringing the statistics home to a personal level, is of a deaf woman seeking an orthopedist’s treatment for her knee. When she inquired about a possible consultation, she asked if her deafness would pose an obstacle to treatment. The orthopedist responded that it would not, they could work together with anatomical models and written notes. The prospective patient replied that she’d like a sign-language interpreter present and the orthopedist said he’d see what it could take to set that up. Upon discovering that an interpreter would cost $120/hour with a two-hour minimum, and knowing that insurance would only pay $58 for a consultation, the orthopedist told the patient they could use written notes.
No, we can’t, replied the patient: Under the ADA I’ve elected an interpreter and you’re required to provide the accommodation to my disability that I elect.
The patient was legally correct. And the orthopedist quickly calculated that for a total fee of $1,200 for operating, but eight visits with the obligatory interpreter, he’d lose serious money. Fortunately for the orthopedist’s P&L, it turned out the patient didn’t need an operation. But–and here’s where the Law of Unintended Consequences kicks in–how many of his professional colleagues do you suppose the orthopedist told about this encounter with the ADA? Exactly. And what are the odds of this patient’s getting top-flight medical treatment down the line, once stories like this circulate? Exactly.
The point then, you’re asking yourself, is?
It’s this: The "law of unintended consequences" should, more properly, be called the "law of unanticipated consequences." Yes, the consequences were unintended, but the road to h*(#, as we all know, and we can’t really fault policy-makers, or managing partners, for having benign intentions.
What we can (and what I do) fault them for is for taking actions or instituting policies that have consequences they do not anticipate.
Because, really, people, it’s so simple. The intellectual failure of analysis that condemns the authors of the Endangered Species Act, of the ADA, and of, say, an inheritable origination-based compensation scheme, is to indulge in lazy static analysis rather than rigorous dynamic analysis. Please, do not pretend you cannot foresee how people will alter their behavior in response to altered incentives. They are not so stupid and you cannot excuse your intellectual shallowness by pretending that you expected them to be stupid and not to respond to the altered landscape.
The consequences are only "unanticipated" if you haven’t thought about them thoroughly and rigorously; and to call them "unintended" is to indict yourself as a poor student of economic rationality and an even poorer student of human nature.
Update: My friend Larry Ribstein responded promptly to this piece with his own take, emphasizing:
"Actually, I’m not sure it’s about stupidity. It’s more about the inherent limitations of the political process. Interest groups use salient news stories as tools to get the laws they want (think Sarbanes-Oxley) – which may not be the laws society needs."
Surely Larry has a nice point. Many of the "bad laws" we get (his phrase) owe their passage to legislators who frankly don’t care what the consequences, intended or anticipated or otherwise, are: They care about their moment in front of the cameras and the presumed boost to their unending re-election efforts (the "permanent campaign"). We, then, are left to deal with the detritus, for all practical purposes in perpetuity.
I think what Larry has in mind is what I refer to as "legislation by anecdote"—the type of thought(less) process that gives us such transparent exercises in pandering to raw emotion as "Megan’s Law." What I chose to emphasize in my piece was not the public policy failures that lead to bad laws (although that’s of course where the raw material for the piece started from), but rather the systematic failure to make smart, "dynamically analyzed," management and leadership choices within private firms.