Law of unintended consequences
Because it is a building block of economic science,
It helps understand
how market economy works
The limits and consequences of economic policy

Definition
The law of unintended consequences states that actions of people—and especially of government—always have effects that are unanticipated or unintended.
Adam Smith the “invisible hand”.
example of a positive unintended consequence. Each individual, seeking only his own gain, “is led by an invisible hand to promote an end which was no part of his intention,” that end being the public interest. “It is not from the benevolence of the butcher, or the baker, that we expect our dinner,” Smith wrote, “but from regard to their own self interest.”
John Locke, example of perverse effect
In 1692 John Locke urged the defeat of a parliamentary bill designed to cut the maximum permissible rate of interest from 6 percent to 4 percent. Locke argued that instead of benefiting borrowers, as intended, it would hurt them. People would find ways to circumvent the law, with the costs of circumvention borne by borrowers. To the extent the law was obeyed, Locke concluded, the chief results would be less available credit and a redistribution of income away from “widows, orphans and all those who have their estates in money.”
Frédéric Bastiat In the first half of the nineteenth century, the “seen” and the “unseen.” The seen were the obvious visible consequences of an action or policy. The unseen were the less obvious, and often unintended, consequences. In his famous essay “What Is Seen and What Is Not Seen,”
When do unintended consequences arise?
when a simple system tries to regulate a complex system. The political system is simple, operates with limited information (rational ignorance) short time horizons, low feedback 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.
Why are they unavoidable?
What is the problem we wish to solve when we try to construct a rational economic order? how to best allocate “given” resources.
One solution would be to gather all the information about all the means, all the preferences, and the same for their substitutions. Formulate the mathematical relationship and feed them into a computer.
For whom is it best and to whom is it given?
It is not a problem of more detailed analysis or more powerful computers: Because the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know.
Because of the very nature of social sciences as compared to natural sciences.
Difference with natural sciences (chemistry)
The information is dispersed in the society.
the knowledge of the particular circumstances of time and place, are a very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules Every individual possesses unique information of which beneficial use might be made, but that be used only if the decisions depending on it are left to him.
There is hardly anything that happens anywhere in the world that might not have an effect on the decision one has to make. But one need not know of these events as such, nor of all their effects. It does not matter why at the particular moment more screws of one size than of another are wanted, or why a particular machine tools has become more difficult to obtain. All that is significant is how much more or less difficult to procure they have become compared with other things with which he is also concerned, or how much more or less wanted are the alternative things we might use. What is relevant to us is the importance of things with which we are concerned. The causes which alter their relative importance are of no interest to us.
The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information ends up by being communicated to all.
The price system is the mechanism for communicating information. The most significant fact is its efficiency, how little the individual participants need to know in order to be able to take the right action.
The marvel is that in a case like that of the scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; i.e., they move in the right direction.
If it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind. Its misfortune is that: first, it is not the product of human design. and second, that the people guided by it usually do not know why they are made to do what they do.
The problem which we meet here is by no means peculiar to economics but arises in connection with nearly all truly social phenomena, with language and with most of our cultural inheritance, and constitutes really the central theoretical problem of all social science.
The failure of central planning and the road to serfdom
There is nothing wrong with planning: every individual males plans..
But planning in the specific sense in which the term is used in the political debate, central planning—direction of the whole economic system according to one unified plan.
This necessarily means to intervene in the economy. The unintended consequences of each market intervention are economic distortions, which generate further interventions to correct them. We must be aware of the political implications on us. Today there do not seem to exist the conditions for a totalitarian solution. But the mechanism described by H in The Road to Serfdom, the book he wrote in the midst of the Cold War, is the same that applies today with the interventions of government which limit our personal freedom or distort our economic decisions.
The Bottom line which I would like you to bring back home
To be aware of the nature of the economic problem is knowledge, and that knowledge is dispersed among individuals. In this sense society does not exist.
The market as a marvel:
It works
It is efficient
It is the product of evolution
There are always unintended consequences, the not seen is more important than the seen. Per se they are the machine that moves the economy.
The acts that limit or try to alter the free interaction of people in the market driven by knowledge and the interest have normally perverse unintended consequences, economical and political.
Examples:
deposit insurance
the cost of the insurance is borne by all
free rider effect: we do not care, no monitoring, no competition, no signal sent to the market on the reliability of the bank, less pressure to efficiency
taxation
excessive
leisure boats
labour
minimum wages
relationship between rigidity in exit and rigidity in entry.
art 18
housing acts and the bubble.