Nominee for MR post of the decade
2008-01-24 · Original WordPress address
Alex is the quiet half of the MR blog, but he usually makes up for his low quantity with high quality. His most recent post, The Law of Unintended Consequences, is in response to this post at the Freakonomics. Alex comes up with this definition for the Law:
The law of unintended consequences is what happens when a simple system tries to regulate a complex system. The political system is simple, it operates with limited information (rational ignorance), short time horizons, low feedback, and poor and misaligned incentives. Society in contrast is a complex, evolving, high-feedback, incentive-driven system. When a simple system tries to regulate a complex system you often get unintended consequences.
The Law should make us hesitate to invoke the so-called Precautionary Principle that I wrote about a couple years ago. The Principle would have us do "something" about climate change because even though there's great uncertainty about the science of climate change, there's a substantial chance of great harm if we do nothing. The Law, though, pushes back on the idea of doing "something" by suggesting that "something" will have unintended side effects.
The NYT piece also got this reaction from Andrew Gelman and someone over at his place has this great take on the Law:
I usually think of the law as a normative one: if you propose a policy to do X and use only the direct consequences of X to motivate your decision, you will have overestimated the effect of X by ignoring indirect effects. The reason the expected effect is always counter to the direct effect is that the economic incentives must work in the other direction -- otherwise you wouldn't have needed to impose X in the first place. Thus, the ingenuity of people attempting to follow the economic incentives underlying the problem will always frustrate, to some extent, the direct effect of what you're trying to do.
The Law suggests anything we do can have significant negative side effects. For whatever reason, incentives are aligned in the economy towards emitting lots of green house gases. Unless we address all of those incentives directly, Andrew's commenter suggests we expose ourselves to the potential for negative unintended side effects.
How to address incentives directly? Balance policy towards pricing green house gas emissions (e.g. CO2 tax) and away from regulations (e.g. CAFE standards).