The Law of Unintended Consequences

“Man proposes, God disposes.”⁴ Civilization was the unexpected consequence of agriculture. The ablutions Islam required before prayer improved sanitation so reduced the spread of disease.

Unfortunately, most unintended consequences seem to be negative. Medicines can have undesirable side effects. Title IX (1972) forced colleges to equalize the number of women and men on teams, reducing the number and variety of athletic programs nationwide and thus US competitiveness in international events such as the Olympics. Public housing makes poverty worse by concentrating people with low skills in areas with few jobs. Rent control reduces the amount of rental housing because landlords cannot make a profit. High minimum wages increase unemployment particularly in entry-level jobs.⁵ Prohibition increased crime without reducing alcohol consumption. Three strikes” sentencing may motivate criminals with two convictions to kill rather than leave witnesses. Gun control has increased rather than decreased crime (Chapter 16).

The reporting requirements of Sarbanes-Oxley increased unemployment by discouraging corporations from registering in the US. In 1993, Congress limited corporate deductions for salaries resulting in a shift in executive pay to stock options that increased the wage disparity between rich and poor. Congress prohibited penalizing late credit card payments, so everyone’s interest went up 2% and fewer people can get the cards. This brought back storefront payday lending that used to be organized crime’s second biggest source of revenue.

In Washington State, environmentalists prevented sustainable harvesting of trees by timber companies, which, unable to make a profit, sold land to developers who cleared it to build houses A California State University campus installed solar panels over a parking lot, making use of unused space to generate its own electricity. The panels shaded cars from the California sun but whenever it rained rust from the frames dripped onto and ruined car finishes, in turn leaving those parking spaces unused as people stopped parking under the panels. Requiring the nation to use billions of gallons of taxpayer-subsidized ethanol has driven up the price of corn and thus of meat from corn-fed animals, reduced the amount of grassland, forest, and wetland habitats cleared to grow more corn, and released massive amounts of carbon dioxide from the soils into the atmosphere. When these factors are considered, greenhouse gas emissions from ethanol will be twice as high as from regular gasoline. Taxpayers are subsidizing the purchasers of electric and hybrid vehicles, which use less gasoline and are cutting into federal and state gasoline tax receipts so reducing funds needed to maintain highways, in turn leading some states to propose taxing miles driven, which requires installing expensive tracking devices in such cars that invade privacy. Asthma is up by a third in the US because “green housing” is sealed so tight that dust, pet dander, and the like cannot escape from buildings, so people are breathing more polluted air than ever before.

With the dual purpose of getting people to trade in old cars for fuel-efficient ones and to boost auto sales in a recession, the federal government initiated “cash for clunkers” with a billion dollars to fund the program from 24 July to 1 November 2009. The result was a sales surge that soaked up the billion dollars in a week but made no change in total sales for the period, buyers waiting until the program launched to make their purchases. The 200,000 or so deals the government program funded was slightly below the normal clunker trade-in rate for the same period. Instead of buying gas-efficient models, people used the taxpayer subsidy to buy more luxurious, less efficient models, eliminating the supposed environmental benefit. The program drove down the supply and thus increased the price of used cars because of the destruction of perfectly good vehicles, and reduced the number donated to charities (Edmunds.com).

The Versailles Treaty created conditions that led to World War II. President Carter made Human Rights the centerpiece of his foreign policy, focusing on Iran. He pressured the Shah to end the torture of and to release prisoners, replace military tribunals with civil courts, and permit freedom of assembly. Unable to defuse the situation, confronted with the withdrawal of US support, and faced with the fury of the mullahs, the dying Shah fled the country. Ayatollah Khomeini succeeded the Shah, executing rather than freeing most of the Shah’s prisoners and some 20,000 pro-Western Iranians as well, and ended the alliance with the US. Decades later, ineffective sanctions are merely complicating the way Iranians do business while strengthening Iranian ties with China, pushing money flows outside the regulated banking system and making it more difficult to trace money laundering, drug smuggling, terror financing, and doing nothing to halt the development of nuclear weapons.

Pell Grants, intended to enable more people to obtain a higher education and equalize economic opportunity, contributed to the tuition price explosion, increased the number of students who do not finish degrees within six years to 60% while saddling them with enormous debts, and allowed students to undertake degrees with relatively low likelihood of leading to gainful employment.

These are examples of what the CIA calls “blowback” and Merton (1936) calls the “Law of Unintended Consequences.” He defined five sources of such consequences that should concern every manager. First, managers seldom have all the information they would like by the time they have to make a decision. Many products require long lead times during which tastes and economic conditions can change. It is difficult to know what qualities—elegance, innovation, price, reliability, service, or something else—will be most important to consumers by the time a product is designed, engineered, produced, and on the market. Additional factors difficult to forecast accurately include material prices, labor costs, currency exchange rates, and interest rates.

Second, managers can err in appraising complex situations, in selecting a course of action, or in implementing one. American, British, French, Russian and other intelligence agencies concurred that Saddam Hussein was hiding weapons of mass destruction in 2003—but apparently he was bluffing. Something that worked in the past may not work again. Generals, they say, plan for the last war, although it is perhaps more accurate to say that winning generals stick with the old while losing generals may try something new.

Third, managers often put immediate before long-term concerns. Business executives plan for short-term profits rather than long-term growth. Managers facing budget problems often defer maintenance.

Fourth, some decisions are self-defeating. New York raised cigarette taxes for the contradictory purposes of raising revenue and reducing smoking, but it only led to massive cigarette smuggling that reduced revenue without reducing smoking. George W. Bush raised tariffs to protect steel industry jobs, destroying even more jobs in steel-using industries than he saved in steelmaking ones, a typical outcome of protectionism, without winning the labor vote that motivated him in the first place.

Fifth, the more ambiguous or complex a situation, the more likely people are to rely on their basic ideology and values (Chapters 5 and 6) regardless of the issues, options, and facts of the situation. The less information there is about political candidates the more likely voters are to vote along party lines.

Unintended consequences are not the same as unforeseeable or unlikely ones. Managers can assess plans in light of the five main sources as an aid to choosing a course of action and to preparing for the consequences of a decision. The energy devoted to doing so will vary by the importance and complexity of the decision and the time available to make it.