What do minimum wages, price controls, and restrictions on international trade in goods, labor, and capital have in common? They are often presented as ways to help poor people, but they all work to their detriment rather than their benefit.
Careful economic reasoning can help cure us of two destructive mental habits. The first is the belief that people will always be helped by the policies we enact in order to help them. The second is a tendency to focus myopically on the consequences of a policy for a specific, favored group while ignoring the consequences of the policy for everyone else. As Henry Hazlitt put it in Economics in One Lesson:
The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.
Just because you mean to do good doesn’t mean that you will actually do good. Minimum wages, for example, render the least-productive members of our society unemployable. Suppose Jack can produce $6 per hour worth of output. In a competitive, unregulated labor market, he will be paid $6 per hour. If we impose a minimum wage of $7.25 per hour, Jack would be unemployable because any employer hiring him would be effectively losing $1.25 per hour that he works. Jack’s wages change not from $6 per hour to $7.25 per hour, but from $6 per hour to $0 per hour. It’s a little more complicated than this, but I have explored these ideas in greater detail for Forbes here and here. I discuss sources and some supporting evidence here.
It isn’t just minimum wages that have unintended consequences. Rent control creates housing shortages, and laws against “price gouging” after natural disasters create shortages of gasoline and building supplies.
People have, with the best of intentions, enacted other policies that make people worse off. Consider workplace safety regulations, which were ostensibly enacted in order to make workplaces safer places to work. These regulations might have resulted in fewer on-the-job accidents, but a safer lunch isn’t a free lunch.
The benefits have costs that are harder to see. Other things equal, an increase in workplace safety will be offset by a reduction in something else, like scheduling flexibility or wages. It strikes me as presumptuous for outside observers to think that they know the “right” combination of workplace safety, income, and other amenities and perquisites that workers should want.
The second mental habit that careful economics can correct is the tendency to judge a policy by how it affects a very narrow group. This or that policy might be “good for farmers” or “good for auto workers” or “good for downtown businesses,” but once again, the benefits aren’t free lunches. The unseen costs consist of whatever else might have been done with the resources that are using to subsidize farmers, prop up car manufacturers, or build a downtown stadium or arena. To borrow from William Graham Sumner, we should remember The Forgotten Man whose pocket is picked to provide these benefits.
After years of studying economicsand with assists from Robin Hanson’s blogmy beliefs about charity and policy have slid toward the view that most charity and policy advocacy has more to do with showing others that we’re charitable and less to do with actually helping people.
For example, you might oppose sweatshops because you think you’re actually helping people in spite of evidence to the contrary. You recycle to show that you care about the earth even though it might actually do more harm than good. As Bryan Caplan argues in his excellent The Myth of the Rational Voter (book here, abbreviated version here, podcast here), you don’t update your beliefs because you don’t have a strong incentive to do so. My Division of Labour co-blogger Wilson Mixon puts it like this: “better to feel good than to do good.”
Compassion is necessary if society is going to function. There are, after all, a lot of people out there who really need it. As the seemingly-endless examples of negative unintended consequences from well-intentioned policies show, compassion alone is insufficient.
Art Carden is a Research Fellow at the Independent Institute in Oakland, California, and Assistant Professor of Economics at Samford University.
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