Why Did THAT Happen?

Regular readers know that I often liken regulation to a balloon... you constrain it in one place and it will pop out in some other, usually unexpected place.  Alex over at Marginal Revolution has good post this morning commenting on an article in The New York Times on unintended consequences.

Dubner and Levitt have an article in the NYTimes with three examples of the law of unintended consequences, the Americans with Disabilities Act made it more costly to hire people with disabilities and reduced their employment, ancient Jewish sabbatical law intended to help the poor has made them worse off, and the endangered species act has resulted in habitat destruction.

Those are three examples where the unintended consequence was actually very related to the regulatory action.  In most cases the consequence has nothing to do with the action, and can even appear unrelated.  Alex goes on to describe the mechanics involved.

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.

Unintended consequences are not restricted to government regulation of society but can also happen when government tries to regulate other complex systems such as the ecosystem (e.g. fire prevention policy that reduces forest diversity and increases mass fires, dam building that destroys wet lands and makes floods more likely etc.)  Unintended consequences can even happen in the attempted regulation of complex physical systems (here is a classic example involving turbulence).

The fact that unintended consequences of government regulation are usually (but not always or necessarily) negative is not an accident.  A regulation requiring apartments to have air-conditioning, for example, pushes the rental contract against the landlord and in favor of the tenant but the landlord can easily push back by raising the rent and in so doing will create a situation where both the landlord and tenant are worse off.

More generally, when regulation pushes against incentives, incentives tend to push back creating unintended consequences.  Not all regulation pushes against incentives, some regulations try to change incentives but incentives are complex and constraints change so even incentive-driven regulations can have unintended consequences.

That was the lesson of government regulation, but a similar case could be made for any organizational bureaucracy.  I continue to be fascinated by the story of Sun Hydraulics that I told you about a couple days ago.  A $170M company with no job titles, performance criteria, company goals or objectives.  The whole company simply operates by a "do the right thing" mantra.  The political equivalent would be anarchy.  But it works in this case.  A very specific and unique case, which is probably why it would work in a political context only in very specific and unique circumstances. 

But it still begs the question... do the rules and regulations in your organization truly help?  Are they necessary or are they simply a band-aid?  And most importantly, what unintended effect are they having?

Is a requirement for perfectly defined and documented processes stifling innovative freedom?  Is a requirement for multiple redundant signatures slowing down your operation?  And perhaps most critically, is the bureaucracy driving your employees to new jobs at new organizations, perhaps even the competition? 

Comments

[David Carlton]

I think the political equivalent might be anarchism, which isn't the same thing as anarchy. I don't know if anarchism works, I'm not sure where it's been seriously tried. Actually, I don't really understand what it is! But it's not just "do whatever you feel like".

[Mark Graban]

What will be the unintended consequences of the government "stimulus"? We might not actually be having a recession. It will take the IRS six months to get checks out. The checks might go to pay off people's credit card debts. Are the credit card companies "stealing" from us taxpayers who make too much money to "earn" rebates?

How about just cutting tax rates?

Argh.