We examine the present in light of the past
so as to better understand the future.
John Maynard Keynes

* With apologies to Karl von Clausewitz

The law of unintended consequences

The law of unintended consequences

The law of unintended consequences is exactly what the title suggests: decisions and actions have consequences which were not intended by the person, or people, who made those decisions or took those actions. Just as stone thrown into water creates ripples that spread outward, so do the consequences of our actions ripple outward and affect others.

I was reminded of this when reading a series of articles on bank lending over the past few years, and how despite a combination of low interest rates and government programmes (in the UK) designed to facilitated borrowing for small businesses, borrowing rates remain very low. It is possible that the very measures the government and the Bank of England have enacted to encourage borrowing are actually discouraging it.

John Locke noticed this phenomenon back in the 1690s, when the government brought in legislation to cut interest rates in order to encourage borrowing and economic growth. In fact, borrowing rates dropped. Why? The answer is simple. Because interest rates were low, banks were less willing to lend money because they would make little or no profit. They had no incentive to lend money, and tightened their lending policies accordingly. Instead of growing, the economy remained flat.

Other economists have commented on the law of unintended consequences too. Robert Merton argued that the law of unintended consequences reflects poor decision making in the first place. Ignorance, self-interest and pre-determined mindsets all contribute to skewed decision making, which leads in turn to results we do not expect. Thus, right-wing governments make cuts to public spending because that is what right-wing governments do – regardless of whether that is the right decision at the time. The consequences (such as rising poverty and unemployment, or growing unpopularity in opinion polls) were not intended when the cuts were made; they are the outcome of bad decision making.

That may be so, but in the nineteenth century Frédéric Bastiat pointed out that all decisions have unintended consequences, along with intended ones. Even if we get the result we want, said Bastiat, there is still the ripple effect. Ford built cheap automobiles because he wanted to give people mobility, the means to travel. He succeeded; but he also gave us urban sprawls, traffic jams and pollution, externalities for which someone else now has to pay.

The basic rule to be observed seems to be this: when making a decision, think about all of the likely outcomes, not just the ones you are hoping for.

This post is inspired by ideas contained in my forthcoming book, Management from the Masters: From Confucius to Warren Buffett Twenty Timeless Principles for Business (Bloomsbury, January 2014)

 

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Oh, no, not another book on management!
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Another one bites the dust - reflecting on my new book on management failures
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