Rats and the Law of Unintended Consequences

In 1900 Sydney, Australia, experienced an outbreak of plague. Knowing that rats bore the disease-carrying fleas, a bounty was enacted to encourage killing rats. Surely a public policy no-brainer.

Result: residents, seeking to profit from the bounty, began breeding rats.

This was noted in an “Edge” essay by psychologist Robert Kurzban, responding to the question, “What is your favorite, deep, elegant, or beautiful explanation?” His was the Law of Unintended Consequences – which is indeed beautifully illustrated by the rat story.

When it comes to any law-making, the most important law of all is the Law of Unintended Consequences. It decrees that whenever you mess about with a complex system (and an advanced modern economy is exceedingly complex), there will be unforeseen and downright unforeseeable results. Nobody can ever be smart enough to avoid this.

Chicago’s Cabrini-Green housing project

And this is the deep problem afflicting the politics of relying on government to right wrongs and improve things. It’s not merely the impossibility of ever foreseeing the real results of a government initiative. Given that the population of affected individuals vastly outnumbers those crafting the policy, it is axiomatic that some of those affected individuals will be more clever or creative than the officials, and will figure out ways to pervert the policy to their own private ends. Like those Aussie rat breeders.

The development of welfare policies is another pertinent case in point. Nobly conceived to help poor families, government policy actually helped to destroy them by penalizing work, marriage, and responsibility, while encouraging social pathologies and a lamentable culture of dependency (especially in  the high-rise developments intended to give “beneficiaries” decent affordable housing, which became hell-holes). Somehow no one foresaw any of this when the programs were created. They weren’t stupid. Merely non-omniscient. 

Cabrini-Green, after

Similar things can be said about the recent financial crisis and mortgage bust – one can argue till doomsday about the causes, but surely part of it was government policies that (as ever) seemed like a good idea at the time – whether you want to blame the policy of encouraging home ownership by less affluent buyers, or the policy of loosening regulation.

And if you believe the remedy for loose regulation is tighter regulation, what makes you think we can actually get it right this time? I have written about the Dodd-Frank disaster. Here, in fact, the bad consequences were foreseeable from the start. The unforeseeable consequences we’ll have to wait a bit for.

In contrast, for all the mistrust and outright loathing it attracts, the free market at least has a crucial safety valve: if you screw up, you go out of business. That includes screwing customers. Nobody stays in business that way very long. Government, of course, stays in business forever, and its dysfunctional policies are very hard to change because they always create beneficiaries who will fight that change. Revising the Australian rat policy would have been fiercely opposed by the rat breeder lobby (I wouldn’t be surprised if it’s still in effect). Another good reason for great caution before creating any new policy.

Dodd-Frank regulating the economy

None of this is to say that we should just throw up our hands and never do anything or try anything. But it does mean that any proposed government tinkering with the economy should be viewed with a skeptic’s gimlet eye – if it sounds good, there’s probably something you haven’t thought of.

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