Unintended Consequences

by Russ Roberts on May 14, 2007

in Seen and Unseen

Here is Glen Whitman writing about the anatomy of unintended consequences. It’s a very nice essay which enhances the reader’s understanding of the economic way of thinking. Whitman distinguishes between those economists and activists who understand incentives and those who understand that the implications of incentives can be a bit more complicated than they first appear.

Here’s the opening:

In the developed world, we like to think of slavery as a bad memory. But
slavery persists to this day, particularly in some parts of Africa,
most notably the Sudan. Raiding parties steal children from their home
villages and transport them for sale in slave markets many miles away.
In the 1990s, when news of this ongoing tragedy came to the developed
world, well-intentioned people formed charitable foundations that
raised money for slave redemption—that is, buying people out of slavery.

Did these charitable efforts do any good? Certainly, some people are
free now who might otherwise of have lived their whole lives in
slavery. But there is strong evidence to suggest that slave redemption
made the overall situation worse. As journalist Richard Miniter
reported in a 1999 article in the Atlantic Monthly,
the high prices offered by relatively rich Americans increased the
demand for slaves, turned the slave trade into an even more lucrative
business, and thereby gave raiders an incentive to conduct even more
slave raids. If not for the activities of Western charitable
organizations, many of the redeemed slaves might never have been
enslaved in the first place!

How did the slave redeemers err? They focused on just one incentive (to
release people already in bonds) while ignoring another (to capture
more slaves). The sad result was an incentive scheme gone awry.

With just an iota of economics training, most people catch on to the
importance of incentives. "Aha! To get people to do what we want, all
we have to do is reward the good stuff and punish the bad stuff!" Alas,
the world is not so simple. People don’t always respond to incentives
in the ways you might predict. What distinguishes good economic
thinking from bad is recognition of the subtle, creative, and often
unforeseen ways that people respond to incentives. Ignoring the complex
operation of incentives is a recipe for unintended consequences.

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{ 8 comments }

Orlando May 14, 2007 at 10:22 am

I read about a similar approach the Japanese used to end opium addiction when they occupied Taiwan, then called Formosa.
They became the supplier of choice by offering high prices for the product. But they were able to drive the producers out of business by causing the price of the whole sale product to plummet
The problem with this approach is that in order to end the practice, both supply and demand must have the same intent. How do you drive down the wholesale price of a slave?

Biomed Tim May 14, 2007 at 1:31 pm

That was a really good essay. I especially liked how there was information on the right side for additional reading. Incidentally, has anyone read "The Economist's View of the World" by Steven E. Rhodes? I'd appreciate any reviews or feedback.

Russ May 14, 2007 at 2:20 pm

I buy fish in the Caribbean and one of my suppliers used to buy turtles – particularly the endangered kind. Thinking that I would help, I began paying a higher price and then freeing the turtles. Unfortunately, the turtles made the return 50 mile journey quickly and I ended up buying them several times over. Once I figured that I was giving the wrong incentive, I stopped the practice.

M. Hodak May 14, 2007 at 2:51 pm

Great find Russell. I collect these stories. If anyone commenting here has more of them, please point the way, or comment here. Thanks.

Sam Grove May 15, 2007 at 2:15 pm

Shows the value of intentions alone.

James Barlow May 16, 2007 at 10:26 am

It would seem the Road to Serfdom is paved with good intentions.

True_liberal May 20, 2007 at 9:47 am

Attributed to Sir Winston Churchill: "However beautiful the strategy, you should occasionally look at the results."

R Schenk May 25, 2007 at 8:55 pm

Rhoads is a very good author–well worth reading.

Here is another example of unintended consequences:

Once a Dream Fuel, Palm Oil May Be an Eco-Nightmare
http://www.nytimes.com/2007/01/31/business/worldbusiness/31biofuel.html?ex=1327899600en=e653a375e67e8e49ei=5088partner=rssnytemc=rss

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