Rebirth of Reason


Changing One Thing
by Joseph Rowlands

A very common mistake that people make is that they imagine a world where one thing changes, while everything else stays the same. They don't realize how connected things are, and how making a change can have significant, and sometimes undesirable, consequences.


One of the most common examples is when politicians think that increasing the tax rate will increase taxes collected by the same percentage. They view the taxable income as fixed in time, and the only variable is the tax rate that they decide. If they want twice the money, they can just tax at twice the rate. What they don't consider is that a higher tax rate will change people's behaviors. If they increase taxes on products like alcohol or cigarettes, people will purchase less of them. If they increase taxes on capital gains, people will invest less or buy tax-free government bonds. If they increase taxes on income, people will choose to spend less time working and more time on non-taxed value pursuits, like leisure.


This view of things is extremely widespread. Many people think that health insurance companies shouldn't be able to reject people for preexisting conditions. They are under the illusion that if the companies changed their policies, there would be no other effects such as a rise in premiums or a death spiral caused by people refusing to get insurance until they needed it, destroying the entire nature of insurance.


Some people have argued against any kind of war on terror or similar attempts to prevent terrorism. The argument is that terrorism is so rare in our country that you are far more likely to die in many other ways than you are from terrorism. What they don't consider is that if all attempts at thwarting terrorism were stopped, there might be a significant increase in the amount of terrorism related deaths.


Still others have argued that since we live in a peaceful democracy and not a tyrannical dictatorship, we don't need many of the limits placed on government to protect against tyranny. Why not revoke the right to bear arms? Why not revoke first amendment protections? Why limit the federal government from encroaching on the states? Again, the assumption is that you can change any or all of these things, and more, while everything else stays the same. You can remove all obstacles to tyranny since we don't live in tyranny, and they never consider that those changes could lead to tyranny.


Repeatedly, the problem is focusing on the thing they'd like to change, while completely ignoring any other possible consequences. It's a kind of irrational focus. It's a fantasy. What if we could change just this one thing? They imagine the world as improved in some way, while ignoring the other likely consequences.


This error is very similar to the one described by Henry Hazlitt in Economics in One Lesson. In that book, Hazlitt describes a basic problem in economic thinking. People tend to focus on the visible effects and ignore the more distant or unseen effects. The entire book goes through example after example, showing how this one error leads to false conclusions and faulty policies, and how much of economics can be understood as a correction to this error.


The classic example Hazlitt uses is a broken window. The townsfolk see a window has been broken and feel sorry for the owner. But then they start to think that it might be an economic benefit. The owner will have to buy a new window, which means the window maker will get new business. He will then spend the money on something else, enriching some other businessman, and on and on the money will go. Hazlitt points out that these are the seen consequences.


The unseen consequence is that the owner would previous have spent that money on something else, like shoes. The money that goes to the shoe salesman would then be spent somewhere else, and on and on. The broken window doesn't stimulate the economy, it redirects it. And more importantly, it results in a net loss. The owner is force to purchase a new window instead of the shoes, which he would have preferred. More generally, wealth in the form of the original window was destroyed, creating a net loss of wealth for society.


The seen versus the unseen is the same kind of error that people make when they think they can change one thing in the world while keeping everything else. They focus the most visible change, the one they are intending to modify. What they don't look at are the unseen effects that occur because of that one change. In the tax rate example, the change in people's behaviors due to a change in tax rate is the unseen effect. It becomes an unintended consequence.


This isn't simply an error in reasoning, though. People do point out that there will be additional effects. Increasing the tax rate may not increase taxes collected. It may actually decrease the total collected. And yet, many people act as if none of that were true.


The reason concerns morality. For many people, the moral measure of the action is what the action produces, and responsibility for the other effects are ignored or dismissed. Politicians will vote to increase minimum wage, for instance, even though it is well known that an increased minimum wage leads to unemployment since the marginal producers lose their jobs. And yet the moral evaluation of raising minimum wage is based entirely on the intended consequences.


The response to the higher minimum wage is a response by others. Specifically, it is the employers that have to fire people. And because the results are a reaction to the one change, the creator of that change is not seen as the one who caused the other effects. Those are always done by other people.


Consider the other examples presented. A tax rate leads to people changing their taxable behaviors. Preventing health insurance companies from discriminating based on preexisting conditions leads to health insurance increasing premiums and consumers deciding to wait until they get sick. Not combating terrorism, or crime in general, leads to terrorists or criminals doing more bad things. And removing restrictions on government to avoid tyranny leads to future governments becoming abusive.


In each case, the causal relationship is indirect. The first change created a set of incentives or costs, while accomplishing the specific goal. The problems only seem to arise when people start acting on the new incentives. They change their taxable behavior, fire marginal employees, etc. Those are new problems, and seen as isolated from the original change because it involves the decisions of entirely different people.


Because the causal link is indirect, people view it as not strictly necessary. Which means they can make their single change and not be morally culpable for the indirect consequences. This creates a moral incentive to act upon the seen versus the unseen. A politician is judged primarily by the thing he directly controls, and not the entirely expected consequences that follow.


Of course, this moral incentive is often coupled with a real ignorance of the unseen consequences. Many people favor an increase in minimum wage because they don't think there will be any other effects. They think that the poor will become wealthier, and it will all just work out. And if you try to point out the entirely expected consequences, they may just conclude that you are against the single change, and just making excuses.

Sanctions: 12Sanctions: 12Sanctions: 12 Sanction this ArticleEditMark as your favorite article

Discuss this Article (3 messages)