Software Nerd

Wednesday, June 04, 2008

Unintended Consequences

Sometimes actions have unintended consequences. However, many unintended consequences should have been anticipated by reasonable men, with a reasonable grasp of the particular area of action. Next time you hear a politician say his actions resulted in "unintended consequences", translate that to mean he's saying he is ignorant and negligent -- the odds favor that explanation. Here are some examples:

Congress creates incentives that divert corn from food to fuel. The unintended consequence: higher corn prices!

Rising food prices mean that farmers in India can get higher revenue. Instead, the Indian government bans export of rice, limiting the demand to the poorer Indian market. However, the farmers are still paying higher prices for inputs like gas, fertilizer (and seed). The unintended consequence: farmers planting less rice!

Or take the government trying to address economic problems (in part) by sending out "stimulus checks". The unintended consequence: future inflation that takes back what it gave.



  • That is a nice economics lesson. The Indian government treats rice as if it is only a static quantity, like a big rice pile in a warehouse, which it must hoard by banning its export. Well, the government forgets that rice must be continuously produced.

    The ironic result is that a policy that seeks to increase the domestic supply of rice by banning its export ends up causing the domestic supply of rice to fall. Farmers can't afford to plant *future* crops of rice.

    Then the Indian government thinks it can solve the problem by banning the conversion of rice paddies to other uses.

    My, how controls breed controls! Such controls always cause harm, usually unanticipated. And how the interconnectedness of markets transmits that harm from one sector to another.

    On the other side of the planet, let's see how far the American government goes in throttling oil producers and speculators. To the extent the government is successful, it will reduce the supply of gasoline and make it more expensive.

    I am actually betting that the U.S. government will not do much, with the rather recent memory of the 1970s gasoline shortages, caused by price controls. I hope I am right.

    By Blogger Galileo Blogs, at 7:17 AM  

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