The Law of Unintended Consequences

There is a golden rule which says that when the State does something to improve your lot, protect you from yourself, make sure that your children come to no harm, prevent you from getting fat (and so on and so on) the actual results will not only be unexpected, but perversely, may result in the opposite.

I'll kick off with an agricultural example from rural France. I think you will recognise that the agricultural lobby, in the West anyway, has done very well since WWII. They have enjoyed subsidies, protective tariffs, guaranteed prices, and compensation when things go wrong with their businesses.

There is one extraordinary bit of protective legislation that I know about, since it directly affected us (though we have been able to resolve it). It is an ideal illustration of the Law of Unintended Consequences.

Because farming operates on an annual cycle, farmers, reasonably enough, want as much notice as possible of changes that will affect them - like the reallocation of land they might be renting.

Now this can be safely left to the free market. People with land to let, but who are unreasonable about time frames, will find it more difficult to let that land, and will find that they can charge less for it. In like vein, farmers who are prepared to take land for one, two or three years will find more land available to them than those who are looking to tie someone into a 20 year contract.

However, in France, the State likes to protect agriculture, and this is how they have "helped" farmers in their struggle with unreasonable landlords.

First, land is now let for a minimum nine year period. That is hefty enough. However, at the end of that nine year period, the renting farmer has the option, by right, to extend the contract for a further nine years, for nine years after that, and so on to perpetuity. Which is pretty scary for the landlord.

It makes no difference if the land is sold in the meantime. For a start, the farmer is protected for the nine years anyway. At the end of the nine years you, the new owner, can petition to get the land back, but if you're a townie say, you can kiss your chances goodbye. Even if you wanted to farm it, it would likely go to a tribunal that could easily rule against you. So you can end up owning, and paying taxes on, as asset that you have no reasonable chance of ever getting back.

OK, let's get to the unintended (but by now quite predictable) consequence. Farmers are kicking and screaming because they can't find land to rent. Oh, the land is there alright, and there are people who would love to rent it out. But because some functionaire can't trust two adults to work out a reasonable contract between them no one dares to let their land.

Another. What turned the British into a nation of home owners, rather than tenants (which many were happy to be)? And in the process turned them into one of the most indebted nations on earth who measure their happiness almost entirely in terms of house prices?

The desire to "protect" tenants against landlords.

This took many forms, almost all of which deterred people from letting property and so ultimately hurting the rented sector. When rents are controlled, the sector gets less profitable and shrinks. When you cannot terminate rental agreements, the sector is less attractive and shrinks. When tenants can be more easily removed from furnished properties than unfurnished ones, the unfurnished sector shrinks so you can only rent something with the cheapest and most hideous furniture imaginable (I did). All the above happened in the UK in the 60s, 70s and 80s.

I know there are unreasonable landlords, but the free market will punish them. They will find it harder to get tenants and will have to charge less for their rentals. As it happened the government played right into their hands by (unintentionally!!) shrinking the sector so that the remaining landlords had people grovelling to get a place, any place.

I confine myself to one more example, road straightening to reduce accidents. Well, you guessed it. Drivers increase their speeds which increases the accident rate, and increases the chance of fatalities among cyclists and pedestrians.

There are many other examples of the Law of Unintended Consequences, but rather than bore you I will invite you to look out for them, and maybe post them in comment form. The key characteristic almost without fail is the state doing something to protect someone, but hurting them by so doing.

Milton Frieman on the free market and pencils

I wrote about pencils, and whether they were sexy or not, here. A little while ago I stumbled across this short video by Milton Friedman, discussing the same theme. It runs for 2 mins 10 sec. I think he tells the story rather well.



Friedman is perhaps best known for his book "Free to Choose" - and also for acting as a part-time advisor to Maggie Thatcher - for which he is famous or infamous depending on your point of view. He had an interesting life.

His parents were Jewish immigrants in America and worked in a sweat shop. Despite this he writes in defense of sweat shops, showing how, for those who have nothing (perhaps not even the right language), they present you with the first rung of a ladder that you can climb. And present an alternative to exclusion; the fate of many people who are, instead, on benefits.

Why pencils are sexy

Are pencils sexy? Or is the title of this post a blatant attempt to exploit sex to get readers?

Well actually, I think that pencils are just a teensy bit sexy because (a) they are without doubt phallic, to a Freudian, and (b) they can tell us a great deal about why free markets work - no, don't go away, this is much more interesting than sex.

OK, so here's a simple question. When did you last have difficulty buying a pencil? You can't remember, can you? What's more, you almost certainly were able to buy the the style, colour and hardness that you wanted. And at a price that didn't make your eyes water.

The pencil example was used during a course I took in economics, before I decided on psychology (and you thought I was making that phallic bit up, shame on you). The example was to illustrate the power of free markets in providing the things that we want at a price we can afford.

Consider. The pencil consists of wood, paint, a ferrule (that's the metal bit), an eraser (not a rubber which, I understand, means something quite different in the States) and the core which is a mixture of graphite and clay. A pencil manufacturer needs to be able to bring together those resources.

But there is an almost infinite chain of knock-on effects. The wood comes from trees which need to be planted. At maturity they need to be felled. To do that you need axes or more likely chain-saws. So there is a pull-through to metal smelters and engineering works to provide those things. But ore needed to be mined first, and machine tools designed and built. Ore bodies need to be prospected and then developed. And in each of these industries we need the right number of people with the right kinds of skills.

I could make exactly the same point about the paint that covers the pencil, or the ferrule, or the eraser, or the graphite core, the system of distribution and so on.

How on earth do all these things come together, in the right quantities, to allow the right number of pencils to be made? You may well ask. In fact I hope you did. As I trailed earlier, it's down to free markets and the pricing mechanism. Every time one of the elements gets out of kilter the price mechanism will correct it. Too much wood? Price goes down because the pencil makers don't need it. Resources move out of wood into something else. Can't get the metal to make ferrules for love or money? Well I don't know if love will talk, but money will. When entrepreneurs see the price of metal being bid up, and supernormal profits being made, they will get into metal, the supply will increase, and the price will move back into the normal range.

Blahdy blahdy blah. What stops this being dull? I'll tell you, using two real examples.

Number one. I used to be an academic at University College London. We had a Russian visit our department. This was in the pre-Glasnost era, late 70s. I was showing him around and he wanted my contact details. He took out his wallet and withdrew from it a carefully folded piece of paper. It already had stuff written on it, right to the edges. He found a blank space, the size of a postage stamp, and wrote my details there. Paper, it turned out, was something he did not have a lot of. Well it was either going to be that, or a glut, spin a coin. At that time the Soviets used to plan, five years at a time, what they would need. Paper would be part of that plan, but from the above you know that means factories, wood, plantations, felling facilities, distribution etc etc ALL of which have to be planned correctly - and since prices would all be fixed, no price mechanism to tell you when you got it wrong. Which means you would get it wrong.

Number two. I had a rant about why Britain's National Health Service, far from being a jewel in its crown, was in fact an expensive mistake. If you followed the above you will understand why something as simple as a lead pencil can't be delivered by a central committee. In the UK they are smart enough to know that. They let pencils arrive courtesy of the free market. But what they do try and deliver by a central committee is a £100 billion health system. Hmmmm.

This is not good news, because we live in an age where governments everywhere are getting very fond of doing everything. Dear oh dear.

Postscript

Adam Smith explained all this much better than I can, and he did it over 200 years ago. He really was a genius, but denigrated by the modern left. His present-day supporters are often branded as neo-conservative loonies. Ah well, pass the Valium.