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Unintended Consequences
The conventional definitions of economics ignore an
important aspect of the field. Economists are not interested in
examining every case of actions based on costs and benefits, but only
on those that have some sort of unexpected or unintended
consequences. Because we live in systems so complex that we
cannot fully understand them, our choices can have system-wide
implications that we neither intended nor expected. Economics starts
with individuals making choices based on self-interest, but it is
primarily interested in how these actions affect society as a whole. Do
these choices lead to chaotic results or to harmonious ones?
Their concern with unintended consequences of human
choice and action leads economists to argue that good results do not
necessarily come from good intentions, and that good intentions do not
necessarily lead to good results. In contrast, parts of our popular
culture believe that intentions determine results. For example, people
who try to find a conspiracy behind all the world's problems, whether
that conspiracy be of Communists, Jews, bankers, the CIA, or
multinational oil companies, start with a belief that bad results must
come from bad people with bad intentions.
As with any other field of study, economics has had a
history and there are books that attempt to trace the trail of economic
thought back to its origins. Although the trail can be traced back to
the ancient Greeks, it is a difficult trail to follow prior to 1776. In
1776, Adam Smith published The Wealth of Nations, a
book that was clearly about economics and that inspired a large number
of books, pamphlets, and articles in the next 50 years. Before this
book most ideas about economics were scattered in writings that were
mostly about politics or ethics or philosophy, not in books that were
clearly about economics. Yet if one looks at the topics and theories
that modern economics textbooks contain and compares them to those
things Smith discussed, one is struck by how little of contemporary
economics comes directly from Smith. What does come from Smith is a
concern about and an interest in unintended consequences.
The most famous term in the Wealth of Nations is "invisible hand." Smith used this term only
once, in the following quotation:
"...[B]y directing that industry in such a
manner as its produce may be of the greatest value, he intends only his
own gain, and he is in this, as in many other cases, led by an
invisible hand to promote an end which was no part of his intention.
Nor is it always the worse for the society that it was not part of it."
Another quotation makes clearer what unintended
consequences the invisible hand leads to:
"Every individual is continually exerting
himself to find out the most advantageous employment of whatever
capital he can command. It is his own advantage, indeed, and not that
of the society, which he has in view. But the study of his own
advantage naturally, or rather necessarily leads him to prefer that
employment which is most advantageous to society."
Smith was not sophisticated in the level of economic
theory that he used. He did not understand concepts that are considered
basic today, such as the model of supply and demand. (Alfred Marshall
developed the modern treatment of supply and demand a century after
Smith.) In his comprehensive survey of economic theory, Joseph
Schumpeter dismisses Smith as a theorist, saying,
"The fact is that the Wealth of
Nations does not contain a single analytic idea, principle,
or method that was entirely new in 1776."
Although the idea that there could be systematic
unintended consequences was "in the air" at the end of the eighteenth
century, no one articulated it as well as Smith did. Because he
expressed so well the idea that these unintended consequences are of
vital importance for understanding how a society works, Smith has often
been called "the father of economics." His book is concerned with a
question that has interested economists for two hundred years: Under
what conditions are actions based on self-interest beneficial to
society? Much of economic theory has been developed and improved in an
effort to get better answers to this question.
The two most influential economists in the generation
after Adam Smith were David Ricardo and Thomas Malthus. Although they
disagreed about many things, they were in general agreement about the
topic of population growth, and it was for his writings on this topic
that Malthus is best known. Malthus believed that there was a tendency
for human populations to grow more rapidly than the food supply could
be increased. Land was fixed in amount, and more food could be produced
either by tilling it more intensively or by adding less-productive land
to tillage. In either case an extra hour of labor brought less than an
average return of food. The implication of these two different growth
rates is cleareventually a segment of the population would face
starvation, and this would cut the growth rate of population.
Malthus' argument on population is pregnant with
possible unintended consequences. Suppose that society aids its most
needy members by giving them food. As a result, they can survive and
reproduce. Helping the poor would, according to Malthus' argument,
increase population and in the future lead to even larger numbers on
the verge of starvation. Hence, charity would be self-defeating. All
attempts to improve society seem doomed to failure, according to a
strict reading of the Malthusian argument, a truly "dismal" conclusion.
However, Malthus and Ricardo were wrong when they
applied this argument to human populations. The predictions they made
did not occur. They underestimated both the capability of technology to
improve crop yields and the future of birth rates. As it became
apparent that they were wrong, economists lost their interest in the
study of population. It seemed not to have the unintended consequences
for them to explore. Since that time, economists have occasionally
developed other clever theories with intriguing possibilities of
unintended consequences, only to find that they too were in conflict
with real-world experience. The reader should bear this in mind as he
learns what contemporary economists believe. There is a possibility
that today's secure truth may be tomorrow's embarrassing mistake.
We end with advice
on how to study economics.
Copyright Robert Schenk
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